Article 9 and Consumer Protection

Consumer protection in Article 9

Debate about the extent and nature of consumer protection in Article 9 was vigorous during the Article 9 revision process in the 1990's, threatening even to derail the entire project. Consumer advocates objected that Revised Article 9 would eliminate or erode consumer protection derived from either the statutory language or common law interpretation of former Article 9. In addition, they urged drafters to add statutory language affording greater consumer protection than former Article 9. Much of the debate focused on issues related to foreclosure and deficiency.

An excerpt from the Reporters' Prefatory Comments to the 1998 draft of Revised Article 9, prepared for the National Conference of Commissioners on Uniform State Laws (NCCUSL), reflects the intensity of the debate and reports the compromise that permitted successful conclusion of the revision process.

Background. In 1995, NCCUSL appointed a subcommittee of the Drafting Committee to consider whether and to what extent Article 9 draft should contain consumer-protection provisions. The subcommittee made several recommendations that the Drafting Committee considered during its meetings in 1996 and 1997. Many of the provisions that the Drafting Committee adopted, and which were discussed at the annual meetings of the ALI membership and NCCUSL, remained highly controversial. The draft that emerged proved unsatisfactory to many representatives of both consumers and consumer creditors.

Proposed compromise solution. In 1997, the Chair of the Drafting Committee initiated a renewed effort to reach a consensus solution that would not be actively opposed by consumer or consumer-creditor interests. After many rounds of discussions and much "shuttle diplomacy," a tentative solution was reached during the February, 1998, meeting of the Drafting Committee.
During that meeting, the Drafting Committee approved in principle, and asked the Reporters to incorporate in the next draft, a list of proposed revisions relating to consumer transactions. Most of the proposals, but not all, related to Part 6, Default. The Chair of the Drafting Committee presented the proposals as a compromise, explaining that if the Drafting Committee and its sponsors accepted the package of proposals, then representatives of consumer creditors involved in the process would actively support, and advocates of consumer interests involved in the process would not oppose, enactment of revised Article 9. The Chair explained further that the alternative could be widespread opposition, with pitched battles in the various legislatures during the enactment process. This controversy could delay or inhibit enactment of the revisions.

Reporters' Prefatory Comment to 1998 draft of Revision of Uniform Commercial Code Article 9

In the compromise ultimately reached, representatives of consumer creditors agreed to support and advocates of consumer interests agreed not to oppose the enactment of a Revised Article 9 in which:

(1) Consumer protection deriving from former Article 9 has been preserved: e.g. limitations on strict foreclosure on consumer goods, U.C.C. 9-620(e); no erosion of existing common law rules (such as the absolute bar rule) on the effect of a commercially unreasonable sale on the availability of a deficiency in a consumer transaction, U.C.C. 9-626(b); preservation of statutory damages where the collateral is consumer goods and the secured party has failed to comply with Part 6 of Article 9, U.C.C. 9-625(c)(2);

(2) Certain new statutory provisions do not apply to consumer transactions: e.g. no Article 9 security interest in deposit accounts in a consumer transaction, U.C.C. 9-109(d)(13); no "dual status" rule in a consumer-goods transaction, U.C.C. 9-103(e)-(h); no safe harbor for timeliness of notification of disposition in a consumer transaction, U.C.C. 9-612(b); no partial strict foreclosure in a consumer transaction, U.C.C. 9-620(g);

(3) A couple of additional consumer protection provisions have been added: contents and form of notification of foreclosure by disposition in a consumer-goods transaction, U.C.C. 9-614; explanation of calculation of surplus or deficiency in a consumer- goods transaction, U.C.C. 9-616, and;

(4) Other proposed consumer protection provisions were not included: e.g. a limited right to reinstate in a consumer-goods transaction (see Commentary.Reinstatement); a rule absolutely barring the recovery of a deficiency in a consumer-goods transaction following a commercially unreasonable disposition; a "fair value rule" crediting a debtor with the fair value of property sold in a commercially reasonable disposition (rather than its actual foreclosure disposition price) for purposes of calculating a deficiency; a rule affording attorney's fees to a consumer debtor or obligor in defined situations.

You will find a fuller description of the consumer protection battle fought in the drafting of Revised Article 9, and a fuller description and assessment of the outcome, in J.Braucher, Deadlock: Consumer Transactions Under Revised Article 9, 73 Amer.Bkry L.J. 83 (Winter 1999). You will find more abbreviated descriptions and assessments of the impact of Revised Article 9 on consumer protection in a two part article posted on the internet by Consumers Union: Overview of the New Article 9 from a Consumer Perspective: Part 1: The Good News [and] Part 2: The Bad News.

The compromise enabled the widespread enactment of Revised Article 9, although at least in California there were post "treaty" skirmishes between consumer advocates and consumer credit representatives before Revised Article 9 was passed. According to Gail Hillebrand of the Consumers Union, an active consumer advocate in the Article 9 revision process, the California Bankers' Association claimed that it had not agreed to the continuation of statutory damages in consumer transactions (see U.C.C. 9-625(c)(2)). Continued negotiation in California led to the following compromise non-uniform amendment to Division 9 of the California Commercial Code: no statutory damages in consumer transactions (elimination of U.C.C. 9-625(c)(2)) in exchange for continuation of California's absolute bar rule in consumer transactions. See Cal. Commercial Code 9-626(b).

Debates about the inclusion of consumer protection also characterized the process of the revision of Articles 3 and 4 of the Uniform Commercial Code (dealing with negotiable instruments and banking) in the late 1980's and have significantly affected the process of revision of Article 2 in the 1990's. I highly recommend a rich narrative about the Article 3 and 4 revision process in which the author claims disregard of the consumer protection perspective and provides valuable insight about the process of drafting uniform legislation. See E. Rubin, Thinking Like A Lawyer, Acting Like A Lobbyist: Some Notes On The Process Of Revising U.C.C. Articles 3 And 4, 27 Loyola of L.A. Law Rev. 743 (1993). Professor Rubin has also argued that the Uniform Commercial Code will never provide either fair or efficient consumer protection, whatever its substantive rules, unless it also provides remedial tools, including attorney's fees to prevailing consumers, statutory damages in a wider variety of cases, or administrative enforcement, to supplement the traditional methods of private litigation. See E. Rubin, The Code, The Consumer, and the Institutional Structure of the Common Law, 75 Wash. U.L.Q. 11 (Spring 1997). Other articles both defending and critiquing the ALI-NCCUSL drafting process are cited in J.Braucher, Deadlock: Consumer Transactions Under Revised Article 9, 73 Amer.Bkry L.J. 83 n.2 (Winter 1999).

Apart from the consumer protection issues resolved in Revised Article 9, Revised Article 9, as did former Article 9, defers to more protective consumer protection law (common law, legislation, or regulation) outside of Article 9. U.C.C. 9-201(b), (c). See, e.g., McManis v. San Diego Postal Credit Union, 71 C.Rptr. 617 (1998) (credit union may have wrongfully repossessed automobile for failure to comply with Cal. Civ. Code 1812.402 governing a lender's right to exercise a creditor remedy pending resolution of a disability claim lodged by the debtor under a policy of disability insurance). Note that consumer protection legislation may explicitly preserve the useful protections for debtors that Article 9 does provide. For example Cal. Civ. Code 2983.8(b) (part of the California Rees-Levering Automobile Sales Finance Act) bars a deficiency claim against a debtor unless the secured party complies with the notice provisions of Article 9 as well as the notice provisions of the Automobile Sales Finance Act. The Bank of America learned this lesson through loss of its $11,000+ deficiency claim in Bank of America v. Lallana, 1998 Cal. Lexis 5592 (Supreme Court 1998).